IDEAS home Printed from
   My bibliography  Save this article

Hedging and Value in the U.S. Airline Industry


  • David A. Carter
  • Daniel A. Rogers
  • Betty J. Simkins


This article discusses the findings and practical import of the authors' study of the fuel hedging activity of 28 U.S. airlines during the period 1992‐2003. The aim of the study was to answer the following question: Does fuel hedging add value to the airlines and, if so, how? The airline industry provides a natural experiment for investigating the relation between hedging and value for a number of reasons: (1) the industry is by and large competitive and remarkably homogeneous; (2) airlines are exposed to a single, volatile input commodity—jet fuel—that represents a major economic expense for all competitors; and (3) fuel price increases cannot be easily passed through to customers because of competitive pressures in the industry. The results of the study show that jet fuel hedging is positively related to airline firm value. Those airlines that hedged their fuel costs had Tobin's Q ratios that were 5‐10% higher, on average, than those of airlines that did not hedge. What's more, the higher the proportion of future fuel requirements hedged, the larger the valuation premium. The authors' results also suggest that the main source of value added by hedging in the airline industry is its role in preserving the firm's ability to take advantage of investment opportunities that arise when fuel prices are high and airline operating cash fl ows and values are down. Consistent with this argument, the study finds that the value premium associated with hedging increases with the level of the firm's capital spending. The authors also report that the most active hedgers of fuel costs among the airlines are the larger firms with the least debt and highest credit ratings. This result is somewhat surprising, at least to the extent that smaller airlines are expected to have larger financial distress costs (as a percentage of firm value) and hence greater motive to hedge. One explanation is that the smaller airlines have lacked either sufficient resources or the strategic foresight to acquire a derivatives hedging capability. A second possibility—one that is consistent with the study's main findings—is that the largest airlines also have the highest costs of financial distress (even as a percentage of firm value) in the form of larger growth opportunities that could be lost as a result of high leverage and financial risk. In other words, only the largest airlines are typically able to buy distressed assets during periods of industry weakness; to the extent this is so, such firms may also have the most to gain from hedging.

Suggested Citation

  • David A. Carter & Daniel A. Rogers & Betty J. Simkins, 2006. "Hedging and Value in the U.S. Airline Industry," Journal of Applied Corporate Finance, Morgan Stanley, vol. 18(4), pages 21-33, September.
  • Handle: RePEc:bla:jacrfn:v:18:y:2006:i:4:p:21-33
    DOI: 10.1111/j.1745-6622.2006.00107.x

    Download full text from publisher

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Olivier J. Blanchard & Jordi Galí, 2007. "The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s so different from the 1970s?," NBER Chapters, in: International Dimensions of Monetary Policy, pages 373-421, National Bureau of Economic Research, Inc.
    2. Olivier J. Blanchard & Jordi Gali, 2007. "The Macroeconomic Effects of Oil Shocks: Why are the 2000s So Different from the 1970s?," NBER Working Papers 13368, National Bureau of Economic Research, Inc.
    3. Rampini, Adriano A. & Sufi, Amir & Viswanathan, S., 2014. "Dynamic risk management," Journal of Financial Economics, Elsevier, vol. 111(2), pages 271-296.
    4. Roll, Richard & Schwartz, Eduardo & Subrahmanyam, Avanidhar, 2009. "Options trading activity and firm valuation," Journal of Financial Economics, Elsevier, vol. 94(3), pages 345-360, December.
    5. Liu, Peng & Lu, Xiaomeng & Tang, Ke, 2012. "The determinants of homebuilder stock price exposure to lumber: Production cost versus housing demand," Journal of Housing Economics, Elsevier, vol. 21(3), pages 211-222.
    6. Rountree, Brian & Weston, James P. & Allayannis, George, 2008. "Do investors value smooth performance?," Journal of Financial Economics, Elsevier, vol. 90(3), pages 237-251, December.
    7. Madowitz, M. & Novan, K., 2013. "Gasoline taxes and revenue volatility: An application to California," Energy Policy, Elsevier, vol. 59(C), pages 663-673.
    8. Anh Duc Ngo & Oscar Varela, 2012. "Earnings smoothing and the underpricing of seasoned equity offerings," Managerial Finance, Emerald Group Publishing, vol. 38(9), pages 833-859, August.
    9. Adams, Zeno & Gerner, Mathias, 2012. "Cross hedging jet-fuel price exposure," Energy Economics, Elsevier, vol. 34(5), pages 1301-1309.
    10. Chantal Roucolle & Tatiana Seregina & Miguel Urdanoz, 2017. "Measuring Airline Networks: Comprehensive Indicators," Post-Print hal-01822938, HAL.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jacrfn:v:18:y:2006:i:4:p:21-33. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley Content Delivery). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.